India's Capex Spending May Slow On Lower Tax Haul, Global Recession

As recessionary woes spread globally, tax collections and asset sales in India are likely to fall, according to analysts

When Finance Minister Nirmala Sitharaman presents this year’s Budget on February 1, she faces the daunting task of balancing a commitment to narrowing the fiscal deficit with keeping the engines of growth well-oiled.

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The pace of spending on infrastructure, buildings, and other fixed assets in India will probably slow in the next fiscal year, a report by Bloomberg said.

India, Asia’s third-largest economy, has leaned on robust capital spending, increasing its infrastructure budget 39 per cent and 26 per cent in the past two years. However, as recessionary woes spread globally, tax collections and asset sales are likely to fall, analysts say.

When Finance Minister Nirmala Sitharaman presents this year’s Budget on February 1, she faces the daunting task of balancing a commitment to narrowing the fiscal deficit with keeping the engines of growth well-oiled. India’s ambition to become the world’s factory hinges on enhancing infrastructure and smoothing out logistics, areas that still need plenty of government funding.

According to the report, government agencies also face the challenge of managing capacity limits, according to Rupa Rege Nitsure, an economist at L&T Finance Ltd. "The statistical base is very high and to spend above it year after year is not feasible within the given resource constraints,” she said.

A likely slowdown in government revenue will further impact spending.

For FY24, which starts on April 1, growth in tax collections may moderate from the 30 per cent pace seen in 2021 and 2022, economists from HSBC Holdings Plc. said.

India’s nominal GDP growth, which isn’t adjusted for inflation, may decelerate to 10 per cent or lower in the coming fiscal year from an estimated 15.4 per cent in the current financial year. “Such a slow growth rate would have serious implications for the macro-economy and financial markets,” Motilal Oswal Investment Services wrote in a report to clients earlier this month.

In the past few years, tax collection outpaced nominal growth as the government tightened compliance rules. The benefits of those measures may have already peaked. At the same time, asset sales are floundering and aren’t expected to rebound a year before India’s national elections, which are slated for 2024.

India targeted Rs 65,000 crore ($7.9 billion) in privatisation revenue this financial year, but so far they have raised just about half of that amount.

Madhavi Arora, an economist at Emkay Global Financial Services, warned of a situation where government spending and private investment will both slow in India. In such a scenario, the “domestic growth story will lack the next lever of secular growth amid missing capex turnaround," she added.